The devaluation was widely seen as a sign that the Chinese
economy was in a much worse state than anyone had previously
believed.

"It was not the currency move per se that concerned market
participants, but rather its implications for the Chinese
economy, trade flows, and global growth rates,"
The Carlyle Group's economist, Jason Thomas, said in a
note titled "Sometimes a Cigar is Just a Cigar."

It seems, in hindsight, that those fears were
overblown. Here is Thomas:

"On its face, RMB reform seemed to be a straightforward attempt
to confront the deflationary pressures arising from the 30%
increase in China's real effective exchange rate over the past
four years. Rather than siphon demand from trading partners, RMB
devaluation was an effort to ease domestic financial conditions,
boost inflation, and create more space for domestic monetary
policy."

It appears that these efforts are paying off.

First, factory price deflation in China has fallen
sharply:

Carlyle

"A year ago, producers' finished goods prices were falling at a
6% annual rate," Thomas said. "Prices have declined by just 1.7%
over the past 12 months and now appear to be rising on a
sequential (month-over-month) basis."

"Real debt service burdens in the Chinese industrial sector have
already declined by more than 4 percentage points," said Thomas.

Carlyle

Finally, the loosening
of credit has helped reduce empty residences by
45%, according to the report. The sector grew at a faster pace
than the overall economy in the second quarter of 2016:

Carlyle

That's not to say that all's well in China, however. It continues
to suffer from excess capacity, nonperforming loans, and
declining returns on capital, according to Thomas.

"Monetary policy cannot solve these structural problems, nor was
that the intention," Thomas said. "Instead, Chinese
policymakers deserve credit for acting decisively to
short-circuit a potential deflationary spiral. As is often the
case, the simplest explanation turned out to be the best."